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Gerber v. Enterprise Products Holdings, LLC: Court of Chancery Upholds Contractual Modifications of Fiduciary Duties

January 12, 2012

In Gerber v. Enterprise Products Holdings, LLC, C.A. No. 5989-VCN (Del. Ch. Jan. 6, 2012), the Court of Chancery enforced the contractual modification of fiduciary duties in Enterprise GP Holdings, L.P.'s partnership agreement and, on a motion to dismiss, dismissed all claims against the defendants arising out of the sale of a subsidiary by Enterprise GP Holdings to an affiliate and the subsequent merger of Enterprise GP Holdings into the same affiliate.

In April 2009, Enterprise GP Holdings sold Texas Eastern Products Pipeline Company, LLC to Enterprise Products Partners, L.P., a publicly traded partnership managed by a subsidiary of Enterprise GP Holdings (the "Sale"). A committee of independent directors of EPE Holdings, LLC, the general partner of Enterprise GP Holdings, approved the Sale after receiving a fairness opinion from Morgan Stanley & Co. In September 2010, Enterprise Products Partners and Enterprise GP Holdings entered into a merger agreement that provided for Enterprise Products Partners to issue units in exchange for all of the outstanding units of Enterprise GP Holdings (the "Merger"). Again, a committee of independent directors of EPE Holdings approved the Merger after receiving a fairness opinion from Morgan Stanley.

Enterprise GP Holdings' partnership agreement addressed transactions, such as the Sale and the Merger, that presented a potential conflict of interest. In short, it provided that any course of action taken by EPE Holdings or its affiliates with respect to a conflict of interest between EPE Holdings or its affiliates, on the one hand, and Enterprise GP Holdings or any of its partners, on the other hand, would not be a breach of any fiduciary duty if it was (i) approved by a majority of the members of a committee made up of independent directors of EPE Holdings; (ii) approved by the vote of a majority of the units of Enterprise GP Holdings, excluding units owned by EPE Holdings and its affiliates; (iii) on terms no less favorable to Enterprise GP Holdings than those generally being provided to or available from unrelated third parties; or (iv) fair and reasonable to Enterprise GP Holdings, taking into account the totality of the relationships between the parties involved. Because a committee of independent directors of EPE Holdings approved the Sale and the Merger, the Chancery Court found that the plaintiffs did not state a claim for breach of any express fiduciary duty in connection with either transaction. Thus, the Chancery Court upheld the contractual modification of fiduciary duties in Enterprise GP Holdings' partnership agreement.

Next, the Chancery Court addressed the role of the implied contractual covenant of good faith and fair dealing in the analysis of the Sale and the Merger. The Chancery Court noted that the implied covenant only applies to parties to an agreement. Accordingly, EPE Holdings was the only defendant that could have breached the implied covenant because it was the only defendant that was a party to Enterprise GP Holdings' partnership agreement. The Chancery Court stated that the implied covenant required EPE Holdings to proceed reasonably and in good faith when exercising the discretion granted to it by Enterprise GP Holdings' partnership agreement when a conflict situation arose. While the plaintiff's complaint alleged that EPE Holdings acted in bad faith by choosing the independent director approval process in lieu of the other three options, the terms of Enterprise GP Holdings' partnership agreement foreclosed that argument. Enterprise GP Holdings' partnership agreement provided that EPE Holdings may consult with advisors and that any action taken in reliance upon an opinion of any such advisor that EPE Holdings believed to be within such advisor's expert competence would be conclusively presumed to be done in good faith. Because the independent directors of EPE Holdings relied upon fairness opinions issued by Morgan Stanley in connection with their approval of the Sale and the Merger, the Chancery Court determined that Enterprise GP Holdings' partnership agreement provided that EPE Holdings had acted in good faith. Thus, EPE Holdings did not violate the implied contractual covenant of good faith and fair dealing in connection with the approval of the Sale or the Merger.